• FY14 EBIT higher but PATMI lower
• Continue operations in competitive LCC
• Maintain HOLD

Ending FY14 with special dividend sweetener

Singapore Airlines’ (SIA) 4QFY14 revenue came in within expectations (-0.2%) at S$3.6b. However, operating loss is 19% narrower than expected at S$60.3m due to lower-than-estimated fuel costs (-2.3%). On a full-year basis, FY14 revenue increased 1.0% to S$15.2b. Expenditure rose in tandem by 0.8%, though we note that this was greatly helped by average jet fuel prices being 5.2% lower YoY. Consequently, FY14 operating profit increased 13.1% to S$259m. Exceptional items and lower contributions from associates, partially mitigated by the S$372m gain from the sale of Virgin Atlantic, dragged FY14 PATMI down 5.1% to S$359.5m. A final and special dividend of 11 S-cents and 25 S-cents respectively were proposed, which we expect to lend near-term support to the share price. According to management, the special dividend was declared by the Board after considering capital adequacy.

Low cost carriers operations to stay

SIA will continue building up its portfolio of brands and operations in the low cost carrier (LCC) segment despite Tigerair’s losses. Though management acknowledges the competitive environment that regional LCCs are in, they think it is a growing market that they want to be part of eventually. While there has been reduction and deferment in aircraft orders recently (e.g. Tigerair, Jetstar, AirAsia), capacity will still increase on a net basis, albeit slower. Hence, turning profitable will still be challenging.

Competition to persist

We expect intense competition to depress operating profit ahead. While outlook is relatively stable for SIA parent airline and SIAEC, we expect operating losses to continue at SIA Cargo (SIAC) and Tigerair, and earnings to be volatile for SilkAir. Though SIAC’s FY14 operating losses narrowed considerably from S$167m to S$100m, it involved one-off grounding of four freighters. Thus, we think there is little room left for SIAC’s turnaround. On the other hand, associated loss from Tigerair will be smaller as Tigerair had divested loss-making units in FY14. Based on 0.77x P/B-net cash (2 s.d. below 2-year historical average), we maintain HOLD with S$9.50 fair value estimate.

Source: OCBC Research - 12 May 2014